Well .. . . what do we make of Stockman's article? For my part, all the
details seem to be correct and there's no undue exaggeration. Early on he
says that, in the event of a financial catastrophe, there will be no new
round of bailouts like the ones the banks received in 2008. What will
follow, he reckons, will be an era of "zero-sum austerity and virulent
political conflict". I wonder what he meant by the latter. Did he mean
between the political ideologies or between government and people. I
imagine he meant the latter.
Keith
At 20:57 31/03/2013, you wrote:
From: [email protected]
[mailto:[email protected]] On Behalf Of Steve Kurtz
Sent: Sunday, March 31, 2013 1:07 PM
Subject: [Ottawadissenters] (D. Stockman) State-Wrecked: The Corruption of
Capitalism in America
<http://www.nytimes.com/2013/03/31/opinion/sunday/sundown-in-america.html>http://www.nytimes.com/2013/03/31/opinion/sunday/sundown-in-america.html
<http://www.nytimes.com/>
The New York Times
March 30, 2013
State-Wrecked: The Corruption of Capitalism in America
By DAVID A. STOCKMAN
GREENWICH, Conn.
The Dow Jones and Standard & Poors 500 indexes reached record highs on
Thursday, having completely erased the losses since the stock markets
last peak, in 2007. But instead of cheering, we should be very afraid.
Over the last 13 years, the stock market has twice crashed and touched off
a recession: American households lost $5 trillion in the 2000 dot-com bust
and more than $7 trillion in the 2007 housing crash. Sooner or later
within a few years, I predict this latest Wall Street bubble, inflated
by an egregious flood of phony money from the Federal Reserve rather than
real economic gains, will explode, too.
Since the S.&P. 500 first reached its current level, in March 2000, the
mad money printers at the Federal Reserve have expanded their balance
sheet sixfold (to $3.2 trillion from $500 billion). Yet during that
stretch, economic output has grown by an average of 1.7 percent a year
(the slowest since the Civil War); real business investment has crawled
forward at only 0.8 percent per year; and the payroll job count has crept
up at a negligible 0.1 percent annually. Real median family income growth
has dropped 8 percent, and the number of full-time middle class jobs, 6
percent. The real net worth of the bottom 90 percent has dropped by
one-fourth. The number of food stamp and disability aid recipients has
more than doubled, to 59 million, about one in five Americans.
So the Main Street economy is failing while Washington is piling a soaring
debt burden on our descendants, unable to rein in either the warfare state
or the welfare state or raise the taxes needed to pay the nations bills.
By default, the Fed has resorted to a radical, uncharted spree of money
printing. But the flood of liquidity, instead of spurring banks to lend
and corporations to spend, has stayed trapped in the canyons of Wall
Street, where it is inflating yet another unsustainable bubble.
When it bursts, there will be no new round of bailouts like the ones the
banks got in 2008. Instead, America will descend into an era of zero-sum
austerity and virulent political conflict, extinguishing even todays
feeble remnants of economic growth.
THIS dyspeptic prospect results from the fact that we are now
state-wrecked. With only brief interruptions, weve had eight decades of
increasingly frenetic fiscal and monetary policy activism intended to
counter the cyclical bumps and grinds of the free market and its purported
tendency to underproduce jobs and economic output. The toll has been heavy.
As the federal government and its central-bank sidekick, the Fed, have
groped for one goal after another smoothing out the business cycle,
minimizing inflation and unemployment at the same time, rolling out a
giant social insurance blanket, promoting homeownership, subsidizing
medical care, propping up old industries (agriculture, automobiles) and
fostering new ones (clean energy, biotechnology) and, above all, bailing
out Wall Street they have now succumbed to overload, overreach and
outside capture by powerful interests. The modern Keynesian state is
broke, paralyzed and mired in empty ritual incantations about stimulating
demand, even as it fosters a mutant crony capitalism that periodically
lavishes the top 1 percent with speculative windfalls.
The culprits are bipartisan, though youd never guess that from the
blather that passes for political discourse these days. The state-wreck
originated in 1933, when Franklin D. Roosevelt opted for fiat money
(currency not fundamentally backed by gold), economic nationalism and
capitalist cartels in agriculture and industry.
Under the exigencies of World War II (which did far more to end the
Depression than the New Deal did), the state got hugely bloated, but
remarkably, the bloat was put into brief remission during a midcentury
golden era of sound money and fiscal rectitude with Dwight D. Eisenhower
in the White House and William McChesney Martin Jr. at the Fed.
Then came Lyndon B. Johnsons guns and butter excesses, which were
intensified over one perfidious weekend at Camp David, Md., in 1971, when
Richard M. Nixon essentially defaulted on the nations debt obligations by
finally ending the convertibility of gold to the dollar. That one act
arguably a sin graver than Watergate meant the end of national financial
discipline and the start of a four-decade spree during which we have lived
high on the hog, running a cumulative $8 trillion current-account deficit.
In effect, America underwent an internal leveraged buyout, raising our
ratio of total debt (public and private) to economic output to about 3.6
from its historic level of about 1.6. Hence the $30 trillion in excess
debt (more than half the total debt, $56 trillion) that hangs over the
American economy today.
This explosion of borrowing was the stepchild of the floating-money
contraption deposited in the Nixon White House by Milton Friedman, the
supposed hero of free-market economics who in fact sowed the seed for a
never-ending expansion of the money supply. The Fed, which celebrates its
centenary this year, fueled a roaring inflation in goods and commodities
during the 1970s that was brought under control only by the iron resolve
of Paul A. Volcker, its chairman from 1979 to 1987.
Under his successor, the lapsed hero Alan Greenspan, the Fed dropped
Friedmans penurious rules for monetary expansion, keeping interest rates
too low for too long and flooding Wall Street with freshly minted cash.
What became known as the Greenspan put the implicit assumption that
the Fed would step in if asset prices dropped, as they did after the 1987
stock-market crash was reinforced by the Feds unforgivable 1998 bailout
of the hedge fund Long-Term Capital Management.
That Mr. Greenspans loose monetary policies didnt set off inflation was
only because domestic prices for goods and labor were crushed by the huge
flow of imports from the factories of Asia. By offshoring Americas
tradable-goods sector, the Fed kept the Consumer Price Index contained,
but also permitted the excess liquidity to foster a roaring inflation in
financial assets. Mr. Greenspans pandering incited the greatest equity
boom in history, with the stock market rising fivefold between the 1987
crash and the 2000 dot-com bust.
Soon Americans stopped saving and consumed everything they earned and all
they could borrow. The Asians, burned by their own 1997 financial crisis,
were happy to oblige us. They China and Japan above all accumulated
huge dollar reserves, transforming their central banks into a string of
monetary roach motels where sovereign debt goes in but never comes out.
Weve been living on borrowed time and spending Asians borrowed dimes.
This dynamic reinforced the Reaganite shibboleth that deficits dont
matter and the fact that nearly $5 trillion of the nations $12 trillion
in publicly held debt is actually sequestered in the vaults of central
banks. The destruction of fiscal rectitude under Ronald Reagan one
reason I resigned as his budget chief in 1985 was the greatest of his
many dramatic acts. It created a template for the Republicans utter
abandonment of the balanced-budget policies of Calvin Coolidge and allowed
George W. Bush to dive into the deep end, bankrupting the nation through
two misbegotten and unfinanced wars, a giant expansion of Medicare and a
tax-cutting spree for the wealthy that turned K Street lobbyists into the
de facto office of national tax policy. In effect, the G.O.P. embraced
Keynesianism for the wealthy.
The explosion of the housing market, abetted by phony credit ratings,
securitization shenanigans and willful malpractice by mortgage lenders,
originators and brokers, has been well documented. Less known is the
balance-sheet explosion among the top 10 Wall Street banks during the
eight years ending in 2008. Though their tiny sliver of equity capital
hardly grew, their dependence on unstable hot money soared as the
regulatory harness the
<http://topics.nytimes.com/topics/reference/timestopics/subjects/g/glass_steagall_act_1933/index.html>Glass-Steagall
Act had wisely imposed during the Depression was totally dismantled.
Within weeks of the Lehman Brothers bankruptcy in September 2008,
Washington, with Wall Streets gun to its head, propped up the remnants of
this financial mess in a panic-stricken melee of bailouts and
money-printing that is the single most shameful chapter in American
financial history.
There was never a remote threat of a Great Depression 2.0 or of a
financial nuclear winter, contrary to the dire warnings of Ben S.
Bernanke, the Fed chairman since 2006. The Great Fear manifested by the
stock market plunge when the House voted down the TARP bailout before
caving and passing it was purely another Wall Street concoction. Had
President Bush and his Goldman Sachs adviser (a k a Treasury Secretary)
Henry M. Paulson Jr. stood firm, the crisis would have burned out on its
own and meted out to speculators the losses they so richly deserved. The
Main Street banking system was never in serious jeopardy, ATMs were not
going dark and the money market industry was not imploding.
Instead, the White House, Congress and the Fed, under Mr. Bush and then
President Obama, made a series of desperate, reckless maneuvers that were
not only unnecessary but ruinous. The auto bailouts, for example, simply
shifted jobs around particularly to the aging, electorally vital Rust
Belt rather than saving them. The green energy component of Mr.
Obamas stimulus was mainly a nearly $1 billion giveaway to crony
capitalists, like the venture capitalist
<http://topics.nytimes.com/topics/reference/timestopics/people/d/john_doerr/>John
Doerr and the self-proclaimed outer-space visionary
<http://topics.nytimes.com/top/reference/timestopics/people/m/elon_musk/index.html>Elon
Musk, to make new toys for the affluent.
Less than 5 percent of the $800 billion Obama stimulus went to the truly
needy for food stamps, earned-income tax credits and other forms of
poverty relief. The preponderant share ended up in money dumps to state
and local governments, pork-barrel infrastructure projects, business tax
loopholes and indiscriminate middle-class tax cuts. The Democratic
Keynesians, as intellectually bankrupt as their Republican counterparts
(though less hypocritical), had no solution beyond handing out borrowed
money to consumers, hoping they would buy a lawn mower, a flat-screen TV
or, at least, dinner at Red Lobster.
But even Mr. Obamas hopelessly glib policies could not match the audacity
of the Fed, which dropped interest rates to zero and then digitally
printed new money at the astounding rate of $600 million per hour.
Fast-money speculators have been purchasing giant piles of Treasury debt
and mortgage-backed securities, almost entirely by using short-term
overnight money borrowed at essentially zero cost, thanks to the Fed.
Uncle Ben has lined their pockets.
If and when the Fed which now promises to get unemployment below 6.5
percent as long as inflation doesnt exceed 2.5 percent even hints at
shrinking its balance sheet, it will elicit a tidal wave of sell orders,
because even a modest drop in bond prices would destroy the arbitrageurs
profits. Notwithstanding Mr. Bernankes assurances about eventually,
gradually making a smooth exit, the Fed is domiciled in a monetary prison
of its own making.
While the Fed fiddles, Congress burns. Self-titled fiscal hawks like Paul
D. Ryan, the chairman of the House Budget Committee, are terrified of
telling the truth: that the 10-year deficit is actually $15 trillion to
$20 trillion, far larger than the Congressional Budget Offices estimate
of $7 trillion. Its latest forecast, which imagines 16.4 million new jobs
in the next decade, compared with only 2.5 million in the last 10 years,
is only one of the more extreme examples of Washingtons delusions.
Even a supposedly bold measure linking the cost-of-living adjustment
for Social Security payments to a different kind of inflation index
would save just $200 billion over a decade, amounting to hardly 1 percent
of the problem. Mr. Ryans latest budget shamelessly gives Social Security
and Medicare a 10-year pass, notwithstanding that a fair portion of their
nearly $19 trillion cost over that decade would go to the affluent
elderly. At the same time, his proposal for draconian 30 percent cuts over
a decade on the $7 trillion safety net Medicaid, food stamps and the
earned-income tax credit is another front in the G.O.P.s war against
the 99 percent.
Without any changes, over the next decade or so, the gross federal debt,
now nearly $17 trillion, will hurtle toward $30 trillion and soar to 150
percent of gross domestic product from around 105 percent today. Since our
constitutional stasis rules out any prospect of a grand bargain, the
nations fiscal collapse will play out incrementally, like a Greek/Cypriot
tragedy, in carefully choreographed crises over debt ceilings, continuing
resolutions and temporary budgetary patches.
The future is bleak. The greatest construction boom in recorded history
Chinas money dump on infrastructure over the last 15 years is slowing.
Brazil, India, Russia, Turkey, South Africa and all the other growing
middle-income nations cannot make up for the shortfall in demand. The
American machinery of monetary and fiscal stimulus has reached its limits.
Japan is sinking into old-age bankruptcy and Europe into welfare-state
senescence. The new rulers enthroned in Beijing last year know that after
two decades of wild lending, speculation and building, even they will face
a day of reckoning, too.
THE state-wreck ahead is a far cry from the
<http://www.federalreserve.gov/boarddocs/speeches/2004/20040220/>Great
Moderation proclaimed in 2004 by Mr. Bernanke, who predicted that
prosperity would be everlasting because the Fed had tamed the business
cycle and, as late as March 2007,
<http://www.federalreserve.gov/newsevents/testimony/bernanke20070328a.htm>testified
that the impact of the subprime meltdown seems likely to be contained.
Instead of moderation, whats at hand is a Great Deformation, arising from
a rogue central bank that has abetted the Wall Street casino, crucified
savers on a cross of zero interest rates and fueled a global commodity
bubble that erodes Main Street living standards through rising food and
energy prices a form of inflation that the Fed fecklessly disregards in
calculating inflation.
These policies have brought America to an end-stage metastasis. The way
out would be so radical it cant happen. It would necessitate a sweeping
divorce of the state and the market economy. It would require a
renunciation of crony capitalism and its first cousin: Keynesian economics
in all its forms. The state would need to get out of the business of
imperial hubris, economic uplift and social insurance and shift its focus
to managing and financing an effective, affordable, means-tested safety net.
All this would require drastic deflation of the realm of politics and the
abolition of incumbency itself, because the machinery of the state and the
machinery of re-election have become conterminous. Prying them apart would
entail sweeping constitutional surgery: amendments to give the president
and members of Congress a single six-year term, with no re-election;
providing 100 percent public financing for candidates; strictly limiting
the duration of campaigns (say, to eight weeks); and prohibiting, for
life, lobbying by anyone who has been on a legislative or executive
payroll. It would also require overturning Citizens United and mandating
that Congress pass a balanced budget, or face an automatic sequester of
spending.
It would also require purging the corrosive financialization that has
turned the economy into a giant casino since the 1970s. This would mean
putting the great Wall Street banks out in the cold to compete as at-risk
free enterprises, without access to cheap Fed loans or deposit insurance.
Banks would be able to take deposits and make commercial loans, but be
banned from trading, underwriting and money management in all its forms.
It would require, finally, benching the Feds central planners, and
restoring the central banks original mission: to provide liquidity in
times of crisis but never to buy government debt or try to micromanage the
economy. Getting the Fed out of the financial markets is the only way to
put free markets and genuine wealth creation back into capitalism.
That, of course, will never happen because there are trillions of dollars
of assets, from Shanghai skyscrapers to Fortune 1000 stocks to the latest
housing market recovery, artificially propped up by the Feds
interest-rate repression. The United States is broke fiscally, morally,
intellectually and the Fed has incited a global currency war (Japan just
signed up, the Brazilians and Chinese are angry, and the German-dominated
euro zone is crumbling) that will soon overwhelm it. When the latest
bubble pops, there will be nothing to stop the collapse. If this sounds
like advice to get out of the markets and hide out in cash, it is.
David A. Stockman is a former Republican
<http://bioguide.congress.gov/scripts/biodisplay.pl?index=s000935>congressman
from Michigan, President
<http://www.nytimes.com/2004/06/06/obituaries/06REAG.html>Ronald Reagans
budget director from
<http://www.nytimes.com/1981/11/09/business/the-regan-stockman-dispute-economic-analysis.html>1981
to
<http://www.nytimes.com/1985/07/10/us/stockman-resigns-top-budget-post-going-to-wall-st.html>1985
and the
<http://www.publicaffairsbooks.com/publicaffairsbooks-cgi-bin/display?book=9781586489120>author,
most recently, of The Great Deformation: The Corruption of Capitalism in
America.
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